Winning that Tax Refund
Have you finished your taxes yet? This time of year my pet peeve is all the advertisements promising you a BIG refund! Like if you get a huge refund you won some kind of tax game. You beat the IRS. Guess what? The bigger the refund the more the IRS beat YOU.
Before you get angry at me, let me explain. Depending on your income, deductions, size of your family, etc. You owe a set amount to the IRS. There is not a single CPA or tax preparing company in the world to change that number. If you have a good CPA, or you have a pretty simple return and you just follow the step by step instructions in Turbo Tax or Tax Act, then your taxes will be done correctly, and you will see what you have paid in either through withholding or quarterly estimated payments, and what you either owe or get back.
The number shouldn’t change no matter who does your taxes. You owe what you owe. Now if you are getting a HUGE refund, you paid too much over the year. That is your money that you gave the IRS throughout the year, and they are just giving it back. In essence, you gave the IRS a loan that made you NO Interest. Now they kept it in an account with everyone else’s interest free loans, so they made money on your money, but you got ZERO benefit.
If you want to beat the IRS, then stop giving them free money. Change your withholding/estimated payments and make sure you are not giving them more than you have to. Owing money or getting $0 back means you kept your money all year. You invested it or used it for your needs, instead of giving it away just to get it back a year later.
So why do we withhold at all? Why do we give them any money until taxes are due? Well, they do have rules to make sure they get theirs. You must withhold throughout the year (or pay quarterly estimated payments) an amount equal to 90% of this years earnings or 110% of last year. A lot of us are not exactly sure how much we will make this year, so a wise plan is to make sure they get their 110%. If you don’t hit these minimums, you get penalized, and that is when you truly lose the tax game!
So you got a HUGE refund back, and you were excited and now I have totally bummed you out. I am sorry. The good news is that you forced yourself into saving a nest egg over the year. But like everything else, you live, you learn. You just need to change your withholding or estimated payments. Talk with your Human Resources department to figure out how to change it on your paycheck. The fun part will be the larger paycheck every pay period!
To figure out what your withholding should be, here are some online withholding calculators to play with:
Turbo Tax Witholding Calculator
This is not meant to be tax advise. This blog is for entertainment purposes. Please seek the advice of a Certified Tax Preparer or CPA when making changes or decisions about your personal tax situation.
